A social contract perspective on public administration∗ Vlad Tarko† Abstract This paper explains how to use the calculus of consent framework to think more rigorously about self-governance, and applies this framework to the issue of evaluating federal regulatory agencies. Robust political economy is the idea that institutions should be designed to work well even under weak assumptions about decision-makers’ knowledge and benevolence. I show how the calculus of consent can be used to analyze both incentives and knowledge problems. The calculus is simultaneously a theory of self-governance and a tool for robust political economy analysis. Applying this framework to the case of public administration leads to the conclusion that private goods (such as medicine) tend to be over-regulated, public goods tend to be under-regulated (such as enabling too much pollution), and regulatory agencies tend to be over-centralized (most of them should either be replaced with certification markets or moved to state level). Keywords: calculus of consent, robust political economy, independent regulatory agencies, environmental protection, drugs regulation ∗I owe special thanks for comments on a earlier version of this paper to Samuel Bagg, Anne Barnhill, David Bernstein, Samuel DeCanio, Jerry Gaus, Eric MacGilvray, Fred Miller, Peter McNamara, Paul Moreno, Sandra Peart, Ronald Pestritto, Joseph Postell, David Schmidtz, and Emily Skarbek. †University of Arizona, Department of Political Economy and Moral Science. Email: [email protected] 1 Introduction The scope of public administration has greatly expanded in recent decades. As the tasks performed by governments have grown in number and complexity, an increasingly larger number of economic activities are regulated by rules created by state bureaucracies and by relatively independent regulatory agencies. These rules, commonly referred to as “administrative law,” are an alternative and complement to both the laws created directly by legislatures and to the common law resulting from the body of judicial precedents. The increasing reliance on administrative law is an important and controversial development of modern democracies (V. Ostrom 1973; Maggetti 2010; Murdoch, Connolly, and Kassim 2018). Independent regulatory agencies (IRAs) are particularly controversial as they are the least accountable to voters. In both the United States and the European Union, IRAs have become more numerous, have seen their staffing grow, and have received increasingly larger budgets (Jordana and Levi-Faur 2004; Braithwaite 2008; de Rugy and Warren 2009). Should we welcome this development, as a path to greater competency (Jones 2020; Kogelmann and Stich forthcoming), or is this trend worrying? In his classic justification of public administration, Woodrow Wilson noted that public administration should be “removed from the hurry and strife of politics . Administration questions are not political questions. Although politics sets tasks for the administration, it should not be suffered to manipulate its offices.” (Wilson 1887) But, as Aligica, Boettke and Tarko (2019, 83) point out, while eliminating the separation between politics and public administration would indeed “undermine the goal of building a competent and professional public administration,” “[i]nsisting too much on this separation unavoidably makes public administration less democratic.” Richardson (2002, ch. 8) argues that the Wilsonian desideratum of “agency instrumentalism” is not even theoretically possible because the public administration will unavoidably add its own goals in the process of establishing its rules and guidelines. Christiano (2005) defends Wilson’s claim that politics and public administration can be in principle separated, but he also notes that, in practice, “the system seems to be set up 2 in a way that those in the bureaucracy have more power than other citizens to make controversial matters” and “[h]ence, the division of labor in the modern state seems incompatible with the ideal of equality that animates democracy.” Democratic capitalist countries use a combination of institutions – markets, civil society, courts, referenda (direct democracy), representative democracy, federalism, public-private partnerships, independent regulatory agencies, inter- national treaties, etc. – to try to, ideally, maximize self-governance and provide public goods as efficiently as possible (V. Ostrom and Ostrom 1977). These institutions, however, can also be (and often are) corrupted, i.e. they are made to serve private interests at the expense of more general interests. Markets can be made uncompetitive (Congleton, Hillman, and Konrad 2008), charities are driven by warm glow rather than effective altruism (Simler and Hanson 2018, ch. 12), courts can have persistent biases and over-reach their competency (Fuller 1978; King 2012, pt. II), democratic elections can suffer from voters’ ignorance and biases (Caplan 2008; Somin 2013; Achen and Bartels 2016), the federal system can become overly-centralized and is vulnerable to inefficient transfers between jurisdictions (James M. Buchanan and Tullock 1962, 200–201, 291–93; Olson 1969; V. Ostrom and Ostrom 1977; V. Ostrom 1987; Aligica, Boettke, and Tarko 2019, 166–68), public-private partnerships can be a major source of rent-seeking, IRAs can be captured by private industry and can suffer from expert hubris (Levy and Peart 2016; Koppl 2018), international treaties can be unenforceable or mere covers for domestic politics, etc. How can we best take advantage of all these institutional options, while min- imizing corruption and increasing self-governance? The standard idea is to have checks-and-balances between these different institutions, but, given their diversity and complexity, analyzing the situation is difficult. To simplify the problem, it is common to compare only two options, for instance asking whether we should rely more on markets or on politics, or asking whether government should be more or less centralized. The analysis of administrative law usu- ally adopts a similar simplified binary perspective, contrasting administrative law with the legislature. For example, Hamburger (Hamburger 2014) argues 3 that much of administrative law in United States is unconstitutional, and rule-making should be returned to Congress. By contrast, others argue that it is unfeasible and/or misguided to assign these tasks to legislatures (e.g., see Jordana and Levi-Faur 2004; Braithwaite 2008), and, indeed, Jones (2020) ar- gues that more tasks should be assigned to independent agencies. Furthermore, there are important political economy reasons why politicians have decided to assign these tasks to regulatory agencies in the first place (Aligica, Boettke, and Tarko 2019, ch. 8). A better analysis of public administration needs to compare it with more than just the legislature, asking, for example, which regulatory agencies could be replaced by more efficient mechanisms, from certification markets to tort law, and, also framing the analysis within a discussion of federalism. We need to ask not only what alternatives we have to IRAs, but also about the proper scale at which different problems should be addressed. For example, should United States have a federal level Environmental Protection Agency (EPA), or would most environmental problems be solved more effectively by decentralizing this task to state levels? Should United States’ Federal Drug Administration (FDA) exist, or should we rely instead on a certification market, similar to how industrial safety is currently being regulated? Is there a simple way to conceptualize such complex questions? This paper does not engage in typical policy analysis, but elaborates instead the constitutional political economy framework of Buchanan and Tullock (1962) and combines it with the idea of “robust political economy” (Levy 2002; Pennington 2011, 2017; Leeson and Subrick 2006; Boettke and Leeson 2012). The argument goes from general to particular. I first present a general framework for answering the question “Which institutions we should use for addressing different types of collective problems?” and then apply this framework to the specific case of public administration. The next section describes the calculus of consent framework and the connection to the idea of self-governance. In my view, the calculus is the best and most rigorous account of self-governance we currently have. Section 2 shows how 4 to use the calculus to better formalize “robust political economy” – the idea that institutions should be designed to work well even under weak assumptions about decision-makers’ knowledge and benevolence. Section 3 applies the expanded calculus framework to the case of the administrative state. The main conclusions are that, compared to what self-governing persons would choose, the current federal bureaucracy tends to (1) over-regulate private goods (such as medicine), (2) under-regulate public goods (such as enabling too much pollution), and (3) be over-centralized. 1 The calculus of consent as a theory of self- governance 1.1 Dahl’s self-governance dilemma Robert Dahl (1989, 89) highlighted the fundamental problem of self-governance as follows: “to live in association with others necessarily requires that [one] must sometimes obey collective decisions that are binding on all members of the association. The problem, then, is to discover a way by which the members of an association may make decisions binding on all and still govern themselves.” Similarly, Buchanan wrote about the “paradox of